How to Measure ROI in Digital Marketing
The future of marketing and sales is digital. Many businesses are steering away from conventional marketing mediums and getting up to speed with the perks of digital marketing.
Digital marketing grants quick access to the mass market at an incredibly affordable price. It is incredible to develop sales strategies and target an audience you cannot reach through conventional marketing. Apart from being more efficient, digital marketing is also more environmentally friendly.
Besides the many perks, one of the most significant advantages of digital marketing is undoubtedly measurability. Digital marketing is easily measurable to help you keep track of your profit. Its efficiency can be measured through web analytics and other metric tools to establish whether digital marketing is profitable for your business or not.
The profitability of digital marketing is expressed through the return of the investment, or simply ROI. If you’ve recently started using online advertising, you’re probably wondering how to measure ROI in digital marketing, and lucky for you, we have a simple answer to your question.
Why Is ROI Important
Back in the day, the business didn’t put that much consideration into marketing. RIO was calculated as the revenue and sales increase generated by a particular marketing strategy. There were no hefty calculations and observations. If sales went up, marketers would extend the marketing strategy. Otherwise, it would be dropped and replaced with a new one.
Nowadays, marketers have an abundance of tools and apps for measuring digital marketing and the efficiency of a particular campaign. They allow marketers to keep up with page views, sources of traffic, goal completion, bounce rates, conversion rates, revenue, profit, etc.
RIO calculators and tools are very beneficial in digital marketing, as they reveal the advantages and the weaknesses of a marketing strategy. By keeping track of your strategy’s performance, you can learn how to work on it to make it better and more profitable.
The Basic ROI Calculation
The mathematical formula for determining your return on investment is relatively simple. All you have to do is divide the net profit by the total cost of your investment and multiply the ratio by a hundred. If we put it into a math equation, it would look like this:
ROI = (Net Profit/Total Cost)*100
We’re sure this looks simple enough when we put it this way. But how can you measure the exact profit made from digital marketing? How can you determine which portion of your profit is accounted for by digital marketing and which isn’t? That’s where many online tools come in handy. From Google Analytics to Sleeknote, there are a lot of apps that will make your life much easier in terms of ROI calculations.
However, ROI isn’t that significant if you cannot place it next to goals and objectives or fail to determine the correct key performance indicators. So before you fire up your calculators, make sure you get a better understanding of the following factors:
Before proving whether your marketing strategy yields profits, you should first understand your marketing objectives. You also have to realize that not all results from digital marketing can be directly measured in the ROI.
For instance, if your objective is lead generation and clicks, you can surpass your goals without it being evident in the ROI. So if you focus on ROI only, you’ll fail to observe the actual effects of your marketing efforts, even if they’re spot on.
Key performance indicators
Before calculating ROI, you should carefully determine the KPIs or key performance indicators. KPIs are measurable values used to track whether your marketing strategy achieves the set objectives. High-level KPIs focus on the impact of the overall business performance, while low-level KPIs focus on the effect of the marketing department.
KPs are unique for businesses, but here are the most common ones:
Unique monthly visitors
As the name suggests, this KPI measures how many people visited your website in a month. The KPI can additionally be studied and segmented by traffic sources, including organic, social, and paid traffic.
Cost per lead
Cost per lead measures the total price you have to pay to generate each lead.
Cost per acquisition
CPA or CAC is the KPI that displays how much you spend on acquiring customers. It is calculated as the ratio between the total marketing expense and the number of acquired customers.
Return on Ad spend
ROAS displays the total profit made through an ad. It is expressed as the ratio between the revenue and the ad spend multiplied by 100.
The leads-to-close ratio is used to express the quality of your leads or how many of the acquired leads were closed. It displays how many leads the marketing team gains and what fraction of those leads are closed by the sales team.
Data collection methods
To measure your KPIs and ROI, you have to collect genuine data. Any obstacles or inconsistencies in entering or managing data can lead to incorrect calculations. If your KPIs are inaccurate, your ROI calculations won’t be any good either.
KPIs along with other factors
Focusing on ROI and overseeing revenue can prevent you from looking at the bigger picture. In many cases, KPIs aren’t directly related to the ROI, but they still play a significant role, and if you study them closely, you’ll reveal a pattern between KPIs and ROI.
For instance, if you note that the number of unique monthly visitors is rising while the cost per customer is taking a plunge, it is evident that your ROI is significantly improving.
With that in mind, even though KPIs may not mean that much by themselves, they can be pretty powerful if you learn how to interpret them along with other factors.
How to Measure ROI in Digital Marketing
Calculate the marketing costs
Before you start calculating the ROI, you have to calculate the total expense of your marketing.
To do that, you’ll have to consider content distribution costs such as podcasts, social media marketing, SEO, marketing automation, blog posts, etc. After you summarize these costs, you’ll have a couple of other expenses to calculate. These include your employees’ salaries or outsourced contractors that work on your digital marketing. You’ll also have to add up the monthly fees for any marketing tools you use, such as website extensions, blog hosting, social media ads, and any other software used in the marketing process.
After you add the distribution costs, the salaries, and the monthly fees for the marketing tools, you’ll get the total cost of your investment.
Determine the gains
Calculating the profit you make with the help of digital marketing can be pretty challenging. Still, several methods can help you estimate what you’re getting for your money.
Calculate conversion rates
Look at the leads from the past period and compare them with the new customers you’ve gained. If you have 5,000 leads and 500 new customers, your conversion rate is 10%.
If you’re working with longer sales cycles, you might need to consider the previous cycle’s leads, as your new customers may be the result of the leads from the earlier cycle. If your sales cycle is 3 months, compare the leads from the first quarter with the new customers in the second quarter to calculate your conversion rate.
Determine monthly leads
Longer sales cycles may be difficult to comprehend. That’s why you must determine the number of leads your marketing strategy generates every month. Look at the yield of different marketing approaches, including content marketing, social media, and SEO. Finding out which method is most beneficial can be surprising and help you improve your marketing strategy. Related: 8 Tips For Maximizing Social Media For Business Purposes
Estimate the number of new customers
After you’ve determined the number of leads and the conversion rate, you can now estimate the number of new customers you can expect to gain. If your marketing efforts bring 1,000 leads with a conversion rate of 10%, you can expect around 100 new customers a month.
Calculate the cost of a new customer
If you have an estimation of your monthly marketing costs, you can quickly divide it by the number of new monthly customers to evaluate the cost of bringing in a new customer.
The customer’s value
After you’ve found out how many customers you can bring in with the help of digital marketing, it’s time you take a look at their value.
If you’re incorporating a loyalty program of storing customer demographic data, you can easily monitor the value of your customers. These approaches will help you see how many repeat customers are, how long they remain loyal, and how much money they are bringing in.
For instance, if an average customer spends $500 a year and remains loyal to your company for 2 years, the customer has a $1,000-lifetime value to your business.
Calculate the ROI
After tackling the above calculations, you should now have all the data needed to calculate the ROI.
However, you should remember that these numbers are variable, as customers are living things, and you can’t expect their static behavior. They can change based on various factors, including your marketing strategy, customer service, or simply the individual nature of your customers.
Tools to Help You Measure ROI
If KPIs and ROI sound challenging and complicated, there’s no reason for you to panic. Not all successful businessmen are experts at digital marketing, and we bet that Jeff Bezos isn’t troubled by questions such as “How to measure ROI in digital marketing?”
Many people rely on convenient tools to help them analyze their digital marketing strategies and track down their profits. So if you’re looking to make managing your business a lot easier, there are tools to help you with the task.
Cyfe and Google Analytics are incredibly powerful for calculating content marketing ROI. If you’re looking to calculate social media marketing ROI, you can use programs such as Hootsuite and Sproutsocial. In terms of search engine marketing, we suggest you try out SEMrush or Sleeknote.
What Is a Good ROI for Digital Marketing
Regardless of the type of ROI you’re measuring, looking at the industry benchmark for specific KPIs can be helpful. For instance, if you’re using Google Adwords, the average conversion rate there is about 2.4%.
You should also expect your order value to be the highest for email marketing and direct and search traffic. Though social media is increasingly popular, it usually yields lower order value. Also Read: How Businesses Use Social Media for Marketing
So if you’re looking to improve your email marketing game, you can use tools such as MailChimp to provide you with estimations about appropriate ROI benchmarks respective to your company’s size, industry, open rates, unsubscribe rates, and click-through rates.
Key Metrics For Different Businesses
As mentioned above, the key metrics vary between industries and companies, so what’s relevant for your business doesn’t have to apply to your competitors. However, there are a couple of key metrics that are equally relative for different categories of businesses, so let’s take a look:
The most important KPIs for e-commerce are website traffic, social media engagement, newsletter subscribers, and cart items. Their most crucial ROI metrics are sales revenue, transaction volumes, transactions, days and sessions to transaction, average order price, etc.
The leading metrics of lead generation are traffic to the website, form conversions and completions, event attendance, demos confirmed, etc. Its most valuable ROI metrics relate to lead, including lead volume and quality, cost per lead, lead conversion rate, and close rate.
For content marketing, the leading metrics include traffic to the website, click-through rate, session duration, pages per session, and different types of engagement. Essential ROI metrics include subscriptions to email lists, downloads, subscription length, shares, etc.
Digital marketing can be a powerful tool if used and monitored wisely. Social media marketing, SEO marketing, content marketing, and targeted emails can help you generate leads and increase the number of customers and sales.
However, if you fail to track down how much profit digital marketing brings in, you may lose money in an unprofitable marketing strategy. That’s why measuring ROI in digital marketing is vital.
ROI calculations will help you determine whether a marketing strategy is profitable and unveil its strengths and weaknesses. So regardless of whether you decide to do the math yourself, or rely on tools to do it for you, make sure you’re always up to date with the performance of your digital marketing strategy and work relentlessly to perfect it.